High bank funding to realty fuelling crisis

Jayant Sharma, 47, was very happy when he bought an apartment in Ghaziabad as along with providing him a roof it would have appreciated in value over the years.

Eight years on, Sharma (name changed) is desperate to sell his expensive flat and move into a rented accomodation.

"I took Rs 35 Lakh home loan to buy a 2 BHK flat worth Rs 52 lakh. I thought I am getting rich by paying off an investment that will grow. Now I am paying Rs 35,000 as EMI even after my recent prepayment of Rs 10 lakh to the bank. I still have to pay Rs 20 lakh of my home loan. This is enough and kind of trap. I am desperately looking for a buyer to sell this home and shift to a rented house," Sharma told DNA Money.

Most of his income goes for home loan EMI and a rented house would come at almost half his EMI.

Sharma is among the growing number of people who bought homes that were bid up hugely by the excessive lending by banks to real estate sector, especially high-cost homes.

Experts say banking crisis has gradually entered the real estate market. The more house prices rose, more the banks lent, leading to more home buyers jumping on the wealth creation opportunity, without knowing how prices were bid up. Many are now ending up with distress sale.

RBI data shows that banks are financing high-cost housing more than any other producing sectors of the economy, including large industries. Lenders have also pumped a huge amount of money into real estate through non-banking finance companies (NBFCs) and housing finance companies (HFCs), which have 60% exposure to developer financing.

At Rs 1,07,236 crore, the share of high-cost housing in India's total fresh loans was highest in fiscal 2018, about 452% more than that to the industry. Similarly, NBFCs got Rs 1,05,361 crore fresh loans, which have mostly been used to fuel the housing market.

The majority of the loan is not being given to increase the economy's productive powers like industries. Banks have disbursed only Rs 19,435 crore new loan to overall industry, including large, medium, micro and small. Out of it, large industry got only 17,293 crore new loans in the same period.

This loan priority is not a mistake. It is a result of the deliberate policy, as in February 2016, RBI was not looking at NPAs in housing as a mjaor challenge. The then RBI deputy governor S S Mundra had said, "Looking at available data it does not seem that there is additional stress on this portfolio (housing)."

The Indian real estate market saw a real estate boom in 2011 to 2014. Housing prices rose up to 30-40 in comparison to the post-financial crisis of 2008. Now, the launches of housing projects, sales and prices of flats are in acute stress. According to Ambit Capital research, the last four years data shows that "sales have declined at a compounded rate of 8% per annum over CY 14-17 with new launches declining by about 30% per annum."

The last ten years' lending pattern shows that banks gradually rely on high-cost housing even when the sales are down.

Banks have been so much obsessed with the housing sector that they have not only increased overall financing to the housing sector, but also have followed the indirect route of funding to developers via NBFCs. This is the reason why high-cost housing and NBFCs share almost 35% of the total fresh loans of banks.

In the last four years, the total lending to developers is about Rs 4 lakh crore, where banks have financed only Rs 1.80 lakh crore and the rest of the amount, Rs 2.2 lakh crore is financed by NBFCs and HFCs. According to Ambit Capital, "Market share of NBFCs/HFCs in real estate developer financing rose to about 60% from just 30% four years ago".

Deepak Shenoy, founder of Capital Mind, told DNA Money, "I feel that the real estate market is ripe for a lot of distress sales, and as more flats come in the market, it will be the job of the lenders (the NBFCs) to be able to liquidate such properties and take their money back. This provides both opportunity and risk because stronger real estate players like Oberoi will not be impacted (they don't have much debt) but the weaker players with too much debt will be hammered. The NBFCs such as Piramal have more than just lending (they are also operational through a realty arm), but there are other NBFCs which have heavy builder exposure that may need to sell."

To make the matters worse, the ongoing liquidity crunch for NBFCs and HFCs is about to generate more NPAs in the housing sector due to riskier developer portfolios, and, also due to a massive gap in an asset-liability mismatch (ALM). NBFCs neither raise deposits nor create money as banks usually create credit through the deposit multiplier. NBFCs depend on banks or short-term money market instrument for their capital requirements, which is costly for NBFCs than banks.

Rajiv Talwar, CEO of DLF told DNA Money, "NBFCs have given money to individuals, they have given money to builders, who have reportedly diverted hundreds of crores. So many projects have suffered, and as a result, NBFCs will have NPAs. It is very important to reinstate their liquidity.".

The biggest risk to NBFCs and HFCs is an exposure in the long-term lending to builders and underwriting loans with very long-term repayment tenures.

"There is a lot of builder financing by the NBFCs and there's definitely a situation where unless builders reduce prices, they will not be able to push up sales and thus return the money. After Real Estate Regulatory Act (Rera), siphoning off money to other projects has been severely curtailed and the big builders have not done much of that. However, the risk is there in smaller builders who will need to sell off to larger builders," Deepak Shenoy said.

Most of the buyers have moved court and Rera as the builders have not allotted them the promised flats despite the deadlines for such allotment expired years ago.

As of now, nearly $34 billion of mutual funds debt in NBFCs and HFCs is maturing between October 2018 and March 2019. According to Anarock Research analysis, "Prior to the crisis, the sector was already dealing with a massive cash crunch and subdued demand, due to which more than 75% of the available credit facility was already exhausted".

After the IL&FS default, NBFCs have halted the disbursal of earlier sanctioned loan amounts to developers for a fear of widening the funding crisis. The worst phase came when some NBFCs urged developers to return the money disbursed to them so that they can repay their dues, AnaRock analysis showed.

RBI deputy governor Viral Acharya said, "The RBI has been watching market developments quite closely since the end of August. We have been in close touch with Sebi to assess the fallout in terms of mutual fund redemptions and the resulting rollover risks for NBFCs and HFCs,"

Financialisation of the housing market is raising the question before policymakers, whether to save banks and bondholders or the Indian economy.

RBI claims that credit patterns are changing positively. An RBI spokesperson said, "The credit growth to the real economy has shown healthy growth this year, especially in the last few months. The adjusted non-food bank credit (ANBC), which gives the flow of financial resources from the scheduled commercial banks to the commercial sector, touched 15.9% during the fortnight ended October 26, 2018 (y-o-y) and sustained the healthy growth at 15.6% during the fortnight ended November 9, 2018. Loans and advances by NBFCs rose 17.9% year on year for the quarter ended June 2018 and 20.1% in the quarter ended September 2018, signifying steady growth rate in the overall flow of credit."

However, buyers like Sharma don't see any respite in the near future, as they are stuck, neither being able to pay EMI nor finding a suitable buyer for his flat.